An inheritance that you didn't see coming sure has its advantages! A recent study led by researchers at the University of Illinois has concluded that early retirement is hastened when an unexpected inheritances comes your way.
The researchers say that their research lends new credence to a widely held economic theory that people value leisure time, and will parlay newfound wealth into less work.
Finance professors Jeffrey R. Brown and Scott Weisbenner say that older workers who get a jolt of cash out of the blue are more likely to cash in on early retirement.
The authors say that their findings may also apply to the recent downturn in the stock market, shedding light on whether some workers might wind up on the job longer because of deep, recession-driven losses in stock portfolios and other investments.
"A negative shock to wealth has just the opposite effect of what we have in this study, so I expect that those losses are going to lead some people to work longer than they expected," said Brown, a senior economic adviser to then U.S. President George W. Bush in 2001-2002.
According to Weisbenner, retirement plans in households that were heavily invested in the stock market will be most affected by the economic crisis, which he says underscores the importance of maintaining a well-diversified portfolio.
"Over the past two decades, workers have become increasingly more responsible for making investment decisions as there has been a shift away from formula-based defined benefit pension plans to account-based defined contribution pension plans. The recent turbulence in the financial markets highlights the importance of thinking about how your retirement plan is invested and the risks to which you are exposed," he said.
During the study, the researchers observed that about a quarter of workers who received a surprise or bigger-than-expected inheritance retired early, compared with 18 percent of total workers surveyed in the ongoing Health and Retirement Survey.
They say that the odds increased significantly as windfalls grew.
"This supports the notion long held by labor economists that, all things equal, people prefer leisure over working. What could be better than early retirement to ramp up your leisure time?" said Brown, the director of the Center on Business and Public Policy in the U. of I. College of Business.
He says the findings could help guide understanding of labour market decisions, including the effect of employer-provided incentives for early retirement or prospective Social Security reforms that could keep workers on the job longer if benefits are scaled back.
He adds that the study may also be a barometer for a long-debated question over what might happen as the massive Baby Boomer generation dies off, passing down trillions of dollars accumulated through stocks and other investments.
"One of the effects it could have is driving people to retire earlier, which has implications ranging from tax revenue to the solvency of Social Security. Retirement is an important economic phenomenon because as people exit the work force they go from being producers and savers to drawing down both their own assets and the government's resources," he said.
A research article describing the study has been published in the Review of Economics and Statistics.